This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
A recent report found that a huge portion of over 50s are still worried about the rising cost of living, despite inflation finally falling to more manageable levels, with 73% naming this as their biggest financial concern.
Rachel Vahey, Head of Public Policy at AJ Bell, says: “The cost-of-living crisis has gripped the UK and pushed up a whole host of monthly costs, [meaning many retirees] will have been hit with a double blow of falling incomes and rising prices.”
The good news is that the State Pension has risen by over £900 a year – an increase of 8.5%, which is one of the biggest rises on record (only bettered by the 10.1% received last year).
So, if you’re eligible for the full State Pension, you’ll start receiving £221.20 a week, up from £203.85. If you reached State Pension age before April 2016, you’ll receive £169.50 a week, up from £156.20.
While the increase is intended to help you cope with the rising costs of living, it’s still a welcome boost (recent analysis showed that the new State Pension is worth over £800 more than if it just rose with inflation over the last three years) – so how can you make the most of it?
We’ve spoken to experts to identify the most important steps in maximising the impact of the increased pension, and one of the key tips is simply sitting down and reviewing your monthly spend.
Alexandra Loydon, Director of Engagement and Consultancy at St. James's Place, advocates “reviewing outgoings to see if you can cut any costs.”
Work out your new income, listing the money you’re now getting in each month, such as that from work, pensions or investments. This is your ‘base level’ to plan your monthly spend from.
From here, list your expenses. We recommend splitting these up into categories such as:
Once this is done, subtract the costs from the income, to give yourself a clear picture of how the State Pension rise has contributed to your overall budgeting picture.
You should also make sure you’re claiming all the benefits allowed, and (especially if you’re investing or saving regularly) considering your tax allowances, to see if you could save anything there too.
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After your new budget calculations, if you’re lucky enough to find that you’ll have some surplus cash left, one option is to save or invest it to put that money to work, and potentially help shore up the amount of money you have in retirement.
Alice Guy, Head of Pension and Savings at Interactive Investor, says “The sad reality is that many people aren't saving enough for a comfortable or even a moderate level of retirement.”
If you were able to use the State Pension rise to save just a few hundred pounds per year, over the course of your retirement this could grow into a useful nest egg, with the interest earned growing quicker the longer you leave it in.
By paying into a savings account, you can help create a longer-term pot of money to gain interest from, as well as having something in reserve for emergencies.
At the time of writing, cash savings accounts are paying out around 5% interest, so if your money isn’t in an account matching these returns, you should think about switching it to make it work as hard as possible for you.
Of course, whether saving or investing is better depends on your situation. Saving is less risky and comes with a guaranteed return, while investing has a much higher money-making potential, but there's also a chance your money can lose value over time.
When it comes to planning your financial future, especially when using a personal pension or thinking about investments, it’s a good idea to consider professional help to guide you through your options.
If you decide that you’d like to open a cash savings account, you’ll need to choose which is right for you.
The most common are:
These can be opened as a Cash ISA, which you can save up to £20,000 in (or split the amount across multiple ISAs) or a standard savings accounts with no limits to the amount you can pay in.
It’s important to do your research here, to find out which kind of account is right for you. For most people, a Cash ISA is a great place to start, as they’re sheltered from tax and mean you get to keep all the interest you earn.
In a normal savings account, you’re currently allowed to earn £1,000 interest if you’re a basic-rate taxpayer, £500 if you’re on the higher rate and there’s no allowance if you’re an additional-rate payer, but these amounts aren’t relevant if your money is saved in an ISA.
If you’ve maximised your ISA allowance and want to still put more money into savings, easy-access accounts might be a useful tool for you if you think you’ll need to withdraw money regularly.
However, if you know the cash is unlikely to be needed soon, fixed-rate bonds (also known as fixed-rate accounts) could be a good place for your money.
It’s worth shopping around to see what rates are on offer – some will have a return that’s high now but could vary over the year – or it may come with a bonus that expires after a fixed amount of time.
Others will give you a better interest rate if you commit to a limit on the number of withdrawals you make per year.
If you decide investing is right for you, there are several options – although it’s critical you choose the right one for your circumstances.
You can invest through accounts like Stocks and Shares ISAs, General Investment Accounts or pension plans, although the amount you can put into a pension will depend on whether you’ve already started taking money from your retirement pot.
Again, an ISA is often a good place to start, as any returns or dividends you gain from your investments (remember, you can invest currently £20,000 across all ISAs) are protected from being taxed – but it’s worth getting professional advice to help you work out if a Stocks and Shares ISA is right for your own circumstances.
Similarly, it might be that bolstering your pension is an option for you, but when it comes to planning your finances in retirement it’s, again, a great idea to seek guidance on what will be right for your own financial situation.
Ultimately, whatever your situation, the increase in the State Pension could be an opportunity for you to find more financial stability.
By adopting a carefully considered approach to your financial future, and seeking expert advice when needed, you can maximise the impact of the rise.
Whether that means balancing your daily budget, saving the money or investing it, the extra £900 can help you pave the way towards greater financial security and peace of mind.
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